Potash Corporation of Saskatchewan Inc. (POT)
Q4 2008 Earnings Call Transcript
January 22, 2009 1:00 p.m. ET

Executives

Denita Stann – Director, Investor Relations
William Doyle – President and Chief Executive Officer
David Delaney – President, PCS Sales
Wayne Brownlee – Executive Vice President and Chief Financial Officer
James Francis Dietz - Chief Operating Officer and Executive Vice President
Joseph Podwika – Senior Vice President and General Counsel
Garth Moore – President, PCS Potash
Thomas Regan – President, PCS Nitrogen & Phosphate

Analysts

Vincent Andrews - Morgan Stanley
Jacob Bout - CIBC World Markets
Michael Piken - Cleveland Research
Jeff Zekauskas - J.P. Morgan
Paul D''Amico - TD Newcrest
Robert Koort - Goldman Sachs
Fai Lee - RBC Capital Markets
Steve Byrne - Merrill Lynch
Terrence Ortslan - TSO Associates
Gary Chapman - Guardian Capital
Sam Kanes - Scotia Capital
Mark Alter - Credit Suisse
Christopher Willis - Impala Asset Management

Presentation

Denita Stann – Director Investor Relations

Good afternoon. Thank you for joining us today and welcome to our fourth quarter and year end earnings call. In the room with us today we have Bill Doyle, our President and CEO, Wayne Brownlee, our Executive Vice President and Chief Financial Officer, Jim Dietz, Executive Vice President and Chief Operating Officer, Joe Podwika, Senior Vice President and General Counsel, Garth Moore, President of PCS Potash, Tom Regan, President of PCS Nitrogen & Phosphate, and David Delaney, President of PSC Sales. I''d like to welcome the media who are listening in and remind people that we are live on our website.

I would also like to remind everyone that statements made in this call that express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in drawing a conclusion or making a projection as reflected in forward-looking information, and actual results could differ materially from what we think appears the most likely at this time. For additional information with respect to forward-looking statements, factors and assumptions, we direct you to our news release and our most recent Form 10-K.

Also, today''s news release, which is posted on our website, includes a reconciliation of certain non-GAAP financial measures to their most directly comparable GAAP measures. I will now turn the call over to Bill Doyle for some comments and then we''ll go to questions.

William Doyle – Chief Executive Officer

Thank you, Denita, and good afternoon, everyone, and thank you for joining Potash Corp.''s fourth quarter and year end conference call. We appreciate this opportunity to discuss another period of record performance and to share our thoughts on current conditions and the strategies we intend to follow to generate continuing long-term growth in our business. Potash is the unquestioned strength of our company in ideal or challenging conditions, and this nutrient was largely responsible for the best fourth quarter in our history. Our earnings of $2.56 per share was the third highest ever and more than double our earnings in the same period last year. Quarterly gross margin of $873.1 million was up 63% quarter-over-quarter, driven primarily by strong potash prices. Our EBITDA of $956 million and cash flow prior to working capital changes of $849 million were both nearly double the same period in 2007.

These quarterly results added to the strength of another record year for our company. 2008 earnings of $11.01 per share were more than triple our 2007 performance. All three nutrients generated record full year gross margin, raising the 2008 total to $4.9 billion, $3 billion more than last year. While we''re pleased to report a fifth consecutive year of record performance, our real focus is on navigating the road ahead. The severe pressure on the global financial system is now well known and the resulting crisis was a blow to almost every industry, including agriculture. The worldwide push to liquidate assets and secure cash took hold and led investors and consumers to become very protective of their capital. This contributed to a significant decline in prices for commodities, including key crops, with futures prices cut nearly in half from second quarter highs.

With farmers taking an extremely cautious approach to deploying working capital, planting decisions and fertilizer applications are under pressure. In South America, where restricted access to capital resulting from the financial crisis corresponded to their primary planting season, fertilizer applications were down in the fourth quarter. In the Northern Hemisphere, a late harvest all but eliminated the normal fall application season, pushing much of the demand into 2009, while winter wheat acreage in the U.S. and parts of Europe was reduced substantially. The result was a chain reaction that stretched from farmers to fertilizer dealers to producers. As farmers deferred purchases, our customers, the dealers, were left holding inventories built during a period of higher demand and prices. With the dealer systems full, sales volumes for all three nutrients declined sharply as the quarter progressed and uncertain market conditions took hold.

Prices for nitrogen and phosphate were hit hard as the collapse of sulfur and ammonia prices led buyers to wait on the sidelines in hopes of bigger bargains. By the end of the quarter, some producers and distributors were selling off nitrogen and phosphate inventories below cash cost mainly due to liquidity concerns. In these unprecedented market conditions, however, higher sale prices did not trigger significant new demand. With buyers on the sidelines, a large percentage of production in all three nutrients was shut down by the end of the quarter. In potash, the total announced production curtailments for the first quarter add up to as much as 5.5 to 6 million tons, over a third of the world''s current production capability. At Potash Corp., we announced our intention to shut down more than 2 million tons of production this quarter after strikes at three of our Saskatchewan mines significantly reduced production late in 2008. In phosphate, an estimated 50% of the world''s solid fertilizer production was being curtailed at the end of 2008. In nitrogen, unprecedented levels of agricultural and industrial production were shut down by year end.

This freeze on fertilizer movement creates an interesting dynamic. Inventories can be held by producers, by dealers, or by farmers, but ultimately they need to end up in the soil for healthy crops to be grown. After record global crop production again in 2008, nutrient levels in the soils have been drawn down. Now, with farmers deferring purchases and in some cases applications, dealers delaying purchases due to full warehouses, and producers shuttering production, the nutrients are neither reaching the ground nor being produced at normal levels. This has been the situation for several months, and it will continue during the first quarter of 2009. However, the fertilizer industry is different from most others as farmers around the world, with the exception of Brazil, are in a good financial position. These are the end users of our products and according to the U.S. Department of Agriculture, American farmers generated a record $90 billion in net income last year and their debt-to-equity ratio dropped to 10%.

If you told U.S. farmers three years ago they could generate a return of $350 an acre over variable costs, there would be no hesitation about buying and putting down all the fertilizer they needed. Crop prices have already rebounded to very supportive levels, with major crops such as corn, soybeans, wheat, and palm oil all significantly higher than they were in early December.

In the key growing regions of China and India, food remains a top priority, with governments working diligently to further incentivize farmers to raise food production. As a result, we expect to see a return to increased planting and proper fertilization in the near future, although the exact timeline is difficult to predict. There is a powerful force behind our industry and that is the fundamental human need for food. Early in 2008, food shortages were a top-of-mind issue around the world and they threatened to become a more pressing issue very quickly. The global farm community produced record crops in three of the past five years, including the current crop year, as they benefited from excellent growing conditions and economics that encourage planting and proper fertilizer use. Yet the global stocks-to-use ratio for the 2008-2009 crop year sits at 18.8%, well below the long-term average, and is poised to drop as we head into the 2009-2010 crop year. We estimate global grain production will fall 2% to 4% below 2008 levels, which could lower the stocks to use ratio to less than 16%.

Growers in South America are being hurt by hot, dry weather, with drought in Argentina believed to be the worst since 1961. The USDA is forecasting a 3% decline in Brazil''s soybean yields and a 9% decline in corn yields, but the combination of low fertilization and hot weather could take them even lower. With an expected decrease in wheat acres and an increase in abandoned acres, the world''s grain production is likely to decline further. The reduction in planting and the failure to replace nutrients in the soil is putting the world''s future food supply at risk. Global population continues to expand by about 75 million people every year. Most of that increase is in countries with growing economies like China and India, where people are gaining the desire and the ability to buy more nutritious food. This means the world needs more grain and with that more fertilizer. Historically, any decline in food production or fertilizer use has led to even stronger rebounds as the need to catch up becomes even greater. That is the situation we need to prepare for today.

At Potash Corp., our long-held strategies, especially our Potash First approach, have enabled us to deliver sustainable earnings growth even in periods of demand fluctuation. With tight supply-demand fundamentals in potash, prices tripled over last year''s fourth quarter and continued to hold firm in the face of the recent commodity free fall. Potash prices have held up amidst the economic crisis because the underlying fundamentals of this key nutrient remain strong and intact. With demand rising, the industry is expected to be supply challenged over at least the next five years. There''s no magic wand for this. Producers are working to prepare for long-term demand requirements with expansions at existing facilities. Our company, which will bring on more than half of the incremental global capacity over the coming five years, is investing more than $6 billion in de-bottlenecking and expansion projects designed to increase our operational capacity to 18 million tons by the end if 2012. With the number of available brownfield projects nearing exhaustion, greenfield projects will be necessary in the not-too-distant future, but companies will be taking a long, hard look at the economic viability before committing to a new development. A greenfield potash operation costs billions of dollars, would take at least five to seven years to generate the first cash flows, and even longer to ramp up to full capacity. That assumes you have a good deposit with a high degree of security from water inflows that are an inherent and uninsurable hazard in this business.